You are on page 1of 36

PhD Proposal

Nexus between PI, Foreign Private Investment, Financial

Development and Economic Growth


Mr. Aftab Hussain Tabassam

Registration NoF141APHMS003


Dr. Arshad Ali Bhatti


Semester 04

The worldwide economy has now started to increase from the effects particularly from deficient
capital movements to the economy which rose from the downfall that happened in 2008 in the
USA. The emerging economies have been harmfully hit by this, owing to decrease in the exports
and capital flows. The most treacherous of these two is a decrease in foreign capital, chiefly the
foreign private investment since it causes to encourage economic progress in poor countries. This
study will provide a useful understanding this nexus between PI, FPI, financial development, FD,
and GDP growth (Gyimah-Brempong, 1999) and Waqas (2015).

Developing countries altered their economic policies in 1980,s with the intention of capturing the
opportunities of globalization. Most of the countries adopted policies to attract foreign funds
inflows. South Asia has frequently perceived a signal for absolute benefits of globalization. Past
empirical researches abetted policymakers to realize what does and what does not work and
where and under what conditions? These research studies and guidelines helped the technique
through which foreign private investment can be attracted.
Alisena and Peroti (1996) demonstrated that political instability and foreign private investments
are inversely correlated with each other. This low investment will adversely affect the financial
development and consequently economic growth.
Veniries and Gupta (1986) and Gupta (1990) have attempted to develop the interconnection of
political fickleness and unpredictability, investment, and economic performance. There are two
reasons proposed by Drazen (2000), that why economic outcomes are affected by the political
instability. First, one suggested by him is that political instability creates uncertainty and
volatility in policy making for future, which as a result creates uncertainty for the private firms
and affects the capital build up. Secondly, it directly affects the productivity by affecting market
work and economic relations.
It has been absolutely admitted that foreign private investment is a vital growth factor of
underdeveloped and poor economies. Foreign private investment provides a chance to the host
country to invest above the level of the local or domestic savings. The advantages of foreign
investment include attracting new knowledge, new technology, higher employment, increase in
competition and above all attracting foreign capital. Low risk in the country and the low
instability are the most significant factors in attracting foreign investment flows. The political
regime stability is referred to the rule of one party without any break that ruling party may be a
single party or coalition of some parties or an authoritarian regime or military dictator. Most
important of all they rule a country for a long time without any pause or major break. The term
politically stable regime is defined differently in economics and political science. In economics,
it has nothing to do with political regime whether it is democracy or dictatorship. The stability of
political regime is an essential feature in choosing the investment amount and location in the host
country. The political instability is thought to be very harmful to the economic performance by
the economists (Tabassam, 2016).


Todaro and Smith define economic growth in the following words, a nonstop procedure of an
economy to rise with the lapse of time consequently rise in national productivity and income
(Todaro and Smith, 2007). It means that during growth economic activities improve and lead to

Investment means, the acquisition of real and financial assets, when a firm acquires plant and
machinery, or stock of goods or when household buys a new property for the sake of capital
gains and rate of return on their financial resources. In simple words investment means when
someone holds financial assets from the financial market. The investment can either by an
individual, firms or even by the government in the local or international markets.
Numerous research literature focused on the international flow of funds which is responsible for
an economic upswing, prosperity, and development. Foreign investment develops the pace of
economic performance and fills the savings-investment gaps. This international flow of capital is
further split into Foreign Aid and Foreign Private Investment. Foreign private investment is
supposed to be the vibrant factor of offshore investment.
We can further split this offshore flow of capital into (FDI) and (FPI) (Chaudhry, 2014)


The IMF Balance of Payment Manual describes FDI, an investment mechanism, have eternal
involvement in the managerial affairs of a corporation working in an economy other than that of
the investor.The main purpose of the investor is to have a significant expression in the
administration of a Business organization. It is a practice in which people of a state acquire the
possession of resources to control business activities of other economies.
The United Nations 1999 world investment report (UNCTAD,1999) describes FDI in the
following way, an investment comprising a long-term correlation and showing an enduring
power and involvement of a resident (person or enterprise) of one country or the economy in a
country or an enterprise of another country or economy. FDI is long-term and permanent in


Foreign portfolio investment along with foreign direct investment is another form of foreign
capital flow. FPI may be defined as the investment in various financial assets that is securities
shares, bonds, treasury bills, mutual funds, derivative instruments and government bonds not
only in developing countries but also in developed economies in search of good profits and
returns. FPI is short-term in nature because it is considered a high return short-term investment in
highly active turnover financial assets (securities). Net portfolio investment is the total value of
assets and the total value of liabilities. Liabilities are the value of stock and debt securities. FPI is
obtained by the sale of debt instruments to foreign investors. FPI securities are very liquid in
nature and may be transformed into cash quickly. (Chaudhry,2014, Baghebo 2014 and


Financial sector or system comprises financial markets, financial intermediaries, and financial
instruments. It also includes financial liberalization. In most of the developing and emerging
economies, it is considered private sector where it contributes the economic development of a
country. Development of financial system stimulates the economic development and growth
through various channels.
The concept of development of financial sector can be described in two phases:
Phase I: Development of financial sector strengthens the economy as a whole, growth, and
development through many ways. It reduces the risk of people to invest, liquidity risk reduction,
intertemporal risk and curtails interest rate of financial institutions, it encourages saving and
convert them into investment this investment brings prosperity in economic growth and
development by lowering inflation and increasing employment. A well structured and sound
financial sector uses all the available economic resources efficiently. (Beck et al., 2005) and

Phase II: Based on Financial Institutions. Literature shows the relationship between institutions
and growth. Exports based development of financial sector based on comparative advantage
financial institutions provide financial facilities and services and skills-based services. This is
undoubtedly taken in terms of value added share in the growth of GDP of a country and
contribute to employment share or level of wages (Beck et al., 2005).

The question arises how financial sector development is measured and how can its intertemporal
effects be predicted on economic development. It is observed by various academic researchers
that financial development does not directly influence economic growth only through financial
Rather it is private sector credit in relation to GDP ratio.This is a proxy used to measure the
financial development and its effects on economic growth. Similarly, domestic credit remains
idle and has no effect on growth. In summary, we can say that fruits of growth are contributed
only by the credit lending to the corporate sector and private enterprises, whereas domestic credit
has no effect on economic development. (Levin et al., 2000), Takyi (2013) and (Beck et al.,
2009) (Beck et al., 2012) and (Samargandi et at., 2015).
Despite the government efforts for the development of the financial sector, Pakistan is still far
behind the advanced countries. Hence, the optimum benefits of financial development on
country’s economic growth are yet to be explored by encouraging market capitalization, private
credit lending in relation to GDP, by curtailing inflation rate, keeping a high level of
employment, low-interest rate credit to private and household sector, improving education and
reducing poverty.


It is always said that a profound political, financial and economic environment is supposed to be
the heaven not only for individuals but also for the business sector either local or foreign. This
sound system ensures enormous foreign private investment, higher return on investment and
sustainable economic growth of a country.Politically stable financial and economic system
encourages financial development, high foreign private investments both FDI and FPI and higher
economic growth. Due to this all the sectors of an economy are flourished. It raises the
employment level which in turn increases the income level of the people. Consequently, per
capita, income and savings of the people increase credit to the private sector also rises.

Unfortunately, in Pakistan continues political instability hampered financial and economic

policies which lead to inefficient economic and financial sectors. A frequent and fickle
government plans could not realize the ideal level of FDI, FPI, and GDP over decades despite
every effort. This increased volatility adversely affected the financial and economic performance
of the country. Political instability is measured by different factors, like coups, regime type,
terrorism, elections, assassinations and corruption which is one of the major cause of such chaos.
Undeniably, political chaos and uncertainty is the major enemy of the investors’ confidence It
makes the investors hold their capital in the nest and makes the capital idle which makes the
investment opportunities wasted and as a loss to the overall economic and financial activities.
The political instability is like the chain effect which gives birth to different kinds of bad things
to the economic prosperity. The Capital movement, rising unemployment, increasing inflation,
low investment and poor financial development have been observed in Pakistan.

This study profoundly focuses on the nexus between political instability, foreign private
investment (FDI, FPI), (FD) and (GDP) to bridge the gap of the desired and the current level of
both economic and financial factors. Nevertheless, an exciting issue is still leftover and under
discussion that, despite political stability, strong financial development high foreign investment,
why most of the countries have remained poor and underdeveloped both economically and
financially ?
Unfortunately, due to political instability, Pakistan is facing low foreign private investment
which causes poor financial sector and ultimately poor economic growth. Although the foreign
private investment is the key determinant of economic prosperity and financial sector
In Pakistan, it has been observed that due to political instability, terrorism, corruption, poor
governance, and energy crisis a large number of investors have to stampede their capital. This
volatile situation not only curtailed the level of foreign private investment but also damaged the
economic performance and financial sector growth and development in Pakistan.Therefore, this
study will envisage and try to develop an association between PI,FPI, FD and GDP in Pakistan.
The purpose of conducting this research with reference to Pakistan is as, Pakistan has been
facing the problem of low productivity, low employment, high inflation, high poverty, low
literacy rate, high imports, high imports and low foreign investments. As a result of a poor
financial as well as economic sectors due to political instability, corruption, poor governance,
lack of technological skills, terrorism, sectarian violence. The main purpose of the study is if a
country is a political stability strong it can attract foreign investors which can develop the
financial as well as economic sectors. These developed Financial and economic sectors can bring
the prosperity in the country. The former will provide credit to enterprise and household sectors.
This will enhance the aggregate demand and aggregate output by providing the employment
level and income level of all the sectors. Consequently, the living standard of the people will
improve due to low inflation, high exports. Govt revenues will increase and all deficits will
reduce. This study will unveil the factors causing underdeveloped and financial and economic


This research study will endeavor in context to Pakistan. As if it is always claimed by the
governments that Pakistan’s economic and financial sectors are deemed remarkable. But in
reality, when it is compared with other countries of the world it lands far beyond in almost every
aspect characterized by political turmoil, underdeveloped financial sector, underprivileged
economic performance and along-with low foreign capital inflows either direct foreign capital
inflows or foreign portfolio inflows. Therefore, the study will envisage the PI, FPI, FD and GDP
nexus by taking data from 1975 to 2017. As there is a circular flow of all political, investment,
financial and economic activities of an economy in a country. Therefore, an improved financial
and economic environment will bring prosperity to every sector of the country. This study will
help other researchers in future for students, teachers and other policymakers to use it for
reference and guidelines while conducting research on time series data.


The nexus between Political Instability, Foreign Private Investment (FDI & FPI), Financial
Development, and Economic Growth: Evidence from Pakistan from 1975-2017.


The issue of political chaos, foreign investments flows, financial sector’s performance and
the economic uprising have been a hot issue under discussion amongst different researchers,
policy makers, academicians and government and business heads since decads. They immensely
emphasized on the political chaos, foreign flow of investment, financial development and
economic performance in an economy which are considered the key to economic prosperity and
development. In reality, political instability results in a decrease in foreign private investment
and economic growth ( Tabassam,2016).
The different political events used by the different researchers included government turns over,
government uncertainty, social unrest, property right executions and political assassinations,
terrorism, corruption, regime changes and frequent elections etc.
This study has incorporated some new variables to fulfill the gap identified above to track the
impact of political instability, In this connection, with these variables, political instability index
will be used by using PCA. Later on, in this research, this PI Index will be used to develop a
nexus between political instability, investment, financial development and economic growth in
Pakistan from 1975-2017 and will provide useful insight and implications about this nexus.
Hence, this study will contribute and divulge the facts that despite enormous efforts still,
Pakistan is struggling to achieve an impressive growth rate and why it has been failed to develop
a sound financial system? Why has Pakistan not been considered heaven for foreign investors
and businesses to invest consistently and frequently on a massive scale? This research effort will
contribute to the empirical studies, discussing the connection between PI, FDI, FPI, FD, and
GDP growth is to provide evidence, whether political instability is the only cause of low
investment, underdeveloped financial sector and poor economic growth. As if, high foreign
investment, financial development, and high growth rate ensure prosperity of a country which
raises the living standard of the people, reduces poverty at large.


What are the causes of low productivity and low GDP in developed economies even they are
financially strong, having a sound financial sector, high FPI, and PI?


Is there any nexus between PI. FPI, FD, and GDP. Does a politically risk-free economy ensure a
high level of FPI, both FDI and FPI, which leads to growth in FD and GDP?


In the past, numerous empirical researchers have been done on the political instability minutely
with other factors. No separate study has been done yet develop the nexus of the political
instability, FPI, FD, and growth in Pakistan. The studies conducted before have discussed the
effect of these variables in panel studies with other political and macroeconomics variables
separately. In Pakistan still, there is a need of composite nexus of these important finance,
macroeconomic and political factors. That’s why this new contribution to the research work in
Pakistan’s perspective is a struggle to bridge the gap while conducting time series study covering
a period of more than 40 years. There are few important objectives will be tried to explore in this
1. To explore the causal correlation between Foreign Private Investment (FI) political
instability (PI) in Pakistan.
2. To establish the connection between Foreign Portfolio Investment (FPI) and political
instability in Pakistan.
3. To envisage the association between Direct Foreign Investment (FDI) and political
uncertainty in Pakistan.
4. To identify the causality between political instability on Financial Development (FD) in
5. To explore the linkage between Foreign Private Investment (FPI) and (GDP) in Pakistan.
6. To discover the link between Foreign Portfolio Investment (FPI) and real GDP growth of
7. To determine the correlation between (FDI) and real GDP growth of Pakistan.
8. To identify the nexus between Financial Development (FD) and (GDP) of Pakistan.
9. Create a unique political instability index with different variables which cause PI.
10. To suggest likely strategic repercussions to attain sustainable growth via foreign capital
flows in Pakistan.


They are few possible weaknesses during a research related to the decision made in the research
study.Sometimes these limitations are difficult to contain but some may be addressed in the
study.Consequences associated with choices made in a study are :
Sampling techniques, data collection strategies, an instrument used, population chosen in terms
of accessibility, time and resources. How would the challenges be addressed? This research is
limited to 42 years from 1975-2017 because the availability of data before the partition is not
available for all variables. Therefore, conclusions and results may be confusing to some extent.
Thre data regarding terrorism and other political instability factors may be another problem. As
this is an academic study so time is also a problem which limits the significance of the study.
Morever, Pakistan has been under threat of terrrorism for the last 15 years so Pakistan’s economy
can not be compared with other developing ecnomies.


This research study will be helpful for the government of Pakistan, policy makers and business
managers for decision making and use the directions and guidelines given in this research to take
advantage of the results and suggestions given in this research to promote financial development
and attain suitable growth and economic performance in Pakistan. This study is also beneficial
for academicians, research students and other researchers to use for their further research.


Undoubtedly, some expenditures will be borne by the researchers himself during this research
either by downloading data, articles or requirements of the university as per rule.


There are no specific ethical issues in this research. As all the work is done by the researcher
with some important references and quotations used by other researchers and it has been tried to
give the reference of those honestly.
1.18 1.11 TIMELINES
This study will be covered within a period of 6 to 8 months positively by the researcher.

It is strongly argued that a stable political system or strong governments either democratic or
military are contributing an ample share in raising the foreign private investments. If a strong
political environment prevails in the country then it will not only encourage the domestic
investors to come out of the shelters and invest in the economy to earn a better return but also to
attract foreign investment. Undoubtedly, the stable political system attracts investors to invest in
their home country rather than shifting and investing abroad. This economic activity will
increase the level of productivity, rise in income level of the society and ultimately raise the
consumption and savings in the economy, which would accelerate aggregate demand and
consequently the economy will grow positively.
There are deleterious consequences of political instability on financial and economic activities of
a country. Due to political instability, the inflation rate is going higher and higher, accompanied
by falling foreign investment and ultimately declining growth rate. The current study will mainly
endeavour to develop finance-growth nexus via political turmoil and foreign capital inflow in
Pakistan. Although, the past literature showed a noticeable nexus of investment, financial
development, economic growth and political instability. This may be investigated in two ways.
1. The politically wobbly environment creates uncertainty and volatility which reduces foreign
private investment which undoubtedly adversely affects financial development and reduces
2. Political uncertainty changes the nature of investment and changes the demand for factors
and the pattern of spending which is directly affecting the investment in a country and then
economic growth.
The previous literature demonstrates that political instability spreads fear among foreign
investors of losing their capital. This low investment will lead to economic and financial
For, risk-averse agents the high probability of change of governments threaten future policies
and they would like to invest somewhere else in the safe place rather than to invest in a risky
environment Alisena et al. (1996). Recent studies regarding this issue show that there are so
many growth variables as suggested as political variables such as political violence, democracy
and government stability (Barro, 1996).
Kiprop M. J. et al., (2015) developed a unique finance-growth nexus via investment and saving
mechanism. In this study, the researchers have attempted to develop the short-run as well long-
run outlook of the finance-growth nexus by addressing the endogeneity problem.Past numerous
theoretical and empirical studies have been conducted using panel or cross-section studies. But
this is a country specific study where time series data have taken for analysis. This study has
been conducted in Kenya perception. This study focuses on the issue of endogeneity,
autocorrelation/serial correlation using ARDL bounds times series technique to invisage the
short run and long run assocation of financial sector development and growth. To measure FD
private sector credit in relation to GDP is taken as a proxy. It is obvious from the results that
there is a positive association between FD and GDP which causes economic growth to increase
in a country, which is in accordance with theory (Adeniyi, O., Oyinlola, A., Omisakin, O., &
Egwaikhide, F. O. 2015).
Anwar (2014) used OLS regression model to capture the consequences of terror on international
inflow of capital and concluded that terrorism inversely affects foreign direct investment in
Pakistan’s circumstances are concerned. It means that Terrorism is the major obstacle for the
foreign investors to invest in Pakistan because of the security risk and low return on investment
i.e. ROI. Moreover, this study also shows that Pakistan has been facing political instability for
decades which threatened the overseas investors to invest in such a risky environment. Investors
are hesitant to invest. They are only comfortable to invest when they are sure for return on their
investment. This study endorses the inverse association of political instability and FDI. But this
study did not discuss the association between political instability, investment, financial sector
development and growth (real GDP) simultaneously.
(Alisena and Perotti,1996) and (Cukeirman ,1992) argued that of all such that political instability
creates instability in economic growth by creating instability of inflation, dipping investment,
increased foreign debt, and budget deficit respectively. Pakistan has faced variations in growth
rate since 1970, where a downturn in economic growth experienced due to political instability
aftershocks of 1971 war. During this war, Pakistan has lost an ample share of financial as well as
human resources. From late 1970 Pakistan has enjoyed a sustainable growth rate until the year
1988, due to the Afghan war, consistent and sustained economic policies. After 1988 downturn
has been seen in Pakistan’s economic growth rate due to only political instability, inconsistent
and irrational political and economic policies. After 2000 again an upward and positive trend in
GDP and growth has been seen (Hussain, 2009). (Gyimah-Brempong,1999) used system of
equations, to study PI, Investment and growth in Africa.
It has been detected in various studies by researchers that a strong and well developed financial
sector exerts a positive influence on the economic performance of various economies of the
world, Kiprop al., (2015), Tabassam(2016) and Moradbeigi (2017). When financial and
economic resources are efficiently used in a country then it will promote productivity and
economic growth with the help of the strong financial institutions and financial market.
Economic prosperity can not merely achieve by financial development directly, however, there
are other indirect channels are also responsible for achieving economic growth. Foreign
Investment, savings.and exchange of goods and services also influences economic growth
indirectly. When the investment in the country increases it creates more jobs and employment,
which raises the income of the people and it increases aggregate demand which ultimately opens
the room for investment projects. This investment promotes and develops financial sector which
causes economic growth to rise, Bagehot (1873), Ranis (1961) Schumpeter (2003), Levin (2004),
and Asghar (2013).These studies strongly argued that a strong financial system will certainly
encourage economic activities such a rise in investment and productivity, which leads long-run
enhancement in growth.
Yang (2008) investigated in their research study as Financial Development and growth are
unidirectional by applying superexogeneity approach. The study has been conducted in Korean
by using time series data from 1971–2002. The empirical analysis supports the notion that “
Finance affects Growth” but not the vice versa in case of Korea. The study focused on various
financial reforms and restructuring of financial sector rather than growth. It has been observed
that only restructuring of the financial sector can speed up the short and long-run growth in
Takyi (2013) predicted in a unique fashion showing the causation of financial development and
growth by measuring financial development first. This investigation examined that a sound
financial sector i.e financial markets and financial institutions have a substantial influence on
economic performance in Ghana. Moreover, this research also critically evaluated the disparity
of financial development in various economies. Few economies with well functioning and
developed financial institutions and financial markets have poor financial sector contributed to
the growth rate. Besides, this examination also raised the question of what are the reasons that
some countries have very good financial sector but others have not. This study raised a question
that why few financially developed countries have very low economic growth. The study
employed the cointegration and ARDL specification for measuring the long-run relationship of
financial development with its determinant and Error Correction Model for measuring short-run
relationship (Voghouei, et al.,2011). and (Voghouei, 2011).

To check the stationarity among the variables the write used unit root test.

Ali (2016) tried to develop the financial development-goth nexus through private credit booms
by focusing on a cross-country phenomenon. In the study, the researchers have developed a
financial development index by using a sophisticated tool called Principle Component analysis
which is used for growth later on. This study has been conducting by grouping few less
developed and few developed economies by applying panel co-integration econometric
technique. This study merely focused on banking efficiency and ignored many other important
determinants of the financial development. Since the study is a panel and various countries have
different political, economic and financial circumstances. That’s why the different estimation
results have been observed in this study, Christopoulos (2004) and Levine (1997).

The variables in the study have been tested and the stationarity of the variables have been
confirmed and integrated at first difference using unit root test and presence of co-integration is
presented. The regression estimates revealed the positive association between financial
development index and growth (GDP), also supported by Kiprop M. al., (2015) and Asghar
(2014). The findings of the study backings the estimates of Kiprop al., (2015) and Céline
Gimet and Thomas Lagoarde-Segot (2012).

Asghar (2013) endeavored to estimate empirically the robust causality between Finance and
economic performance and analyzed empirically.The study has been initiated by taking data of
some developing economies from 1978 to 2012. The study attempted to provide evidence of
long-run causality between the variables by using foreign direct investment, trade and trade
openness through which Financial development influences economic performance. The financial
development index has been constructed by including numerous variables to capture the effect of
maximum variables.The study also attempted to give the measures that how different countries
can avoid a financial crisis like 1997 and 2007-8 which has been experienced due to imperfect
financial markets and weak financial sectors which caused economic growth to fall. The study
applied panel unit root, panel cointegration tests to present interconnection of long-run and
connection among variables. Estimates presented the weak cointegration among variables due to
the underdeveloped and inefficient financial system in various countries, due to inefficient
financial and economic resource allocation which causes weak influence of financial
development on economic performance.
Hasan (2008) used ARDL approach to analyze the long run causality of Pakistani stock prices
and major macroeconomic variables. The study indicated that FPI has an important short-run and
long-run influences on stock market and growth.
Chaudhry et al. (2014) endeavored to examine the nexus between a few macroeconomic
variables and growth. This study describes that foreign portfolio investment (FPI) is the major
component of foreign private investment which is deemed a key factor in improving economy
and growth. This study uses the net portfolio investment as a proxy of FPI. Despite its volatile
nature and high risk in Pakistan FPI is considered to be the most important factor of enhancing
foreign private investment. This investment caused to rise in economic activities even in 1997
Asian crisis. The major contribution of FPI is to bridge the gap between investment and savings.
This will help be the cause of overall prosperity of economy and the masses as well.

H1a: Political instability is negatively associated with a foreign direct investment (FDI).
H1b: Countries having lower foreign direct investment has poor economic performance(GDP).
H2a: Political instability is negatively associated with foreign portfolio investment (FPI).
H2b: Countries having lower foreign portfolio investment (FPI) has poor economic
H3a: Political instability is negatively associated with financial development (FD).
H3b: Countries having poor financial development (FD) has poor economic performance (GDP).

The theoretical perspective that has been taken in the analysis of data in this research work is
2SLS and 3SLS technique to determine the nexus between political instability, foreign private
investment, and growth. Initially, at first stage, political instability index will be constructed with
the help of PCA using political instability factors. In the second stage, the influence of political
instability on private investment will be determined. A third stage, the effect of FPI on growth
will be analyzed. Finally, financial development will be measured and later on its nexus with
growth will be analyzed. In this study investment analysis and portfolio management, corporate
finance, financial management, international trade, macroeconomics books and research articles
are taken as reference and to cite the important concepts related to the study. As this study is a
time series so to check the overall nexus between PI, FPI, FD and GDP time series econometric
methodology will be used to predict the short-run and long-run association of the mentioned
variables among themselves. Time series econometric modellings, OLS method and systeme of
equations will be used in this study.


In this research study, the data secondary and will be quantitative time series in nature. In this
research study, explanatory research design will be used because it will discuss the cause and
effect relationship between the variables. Therefore this study will follow the quantitative –
deductive approach. Because in this we move from theories to data as we are evaluating our
theories to our data. The quantitative approach is about examining the relationship between
variables. In this research, we use computer software ie STATA, Eviews, Excel MINITAB and
many more and inferential statistics for analysis.

3.1.2 Description of the Sample Size

For the research, the total sample will be taken from 1975 to 2017 of Pakistan. But for this
study, the author will try to develop the nexus between political instability, foreign private
investment, Financial Development and economic growth with reference to Pakistan.


This study will use monthly, quarterly and annual time series data from 1975-2017. Major
possible sources of data are (WDI), (WEO) as well as Penn World Tables ( 6.3, 7.1, 8.0)
Quandle Financial And Economic Data Base, Trading Economics, Global Financial Data Base,
Fact Fish, Global Financial Index, SBP, SECP, Business Recorder, International Financial
Statistics, Data Market, OECD Stat, The Global Economy, FAOSTAT, KNOEMA Data Base,
UNCTAD’s Statistical, Federal Reserve Economic Data, Govt of Pakistan Ministry of Finance.
The data will be obtained was deflated by GDP deflator to convert them into real values in order
to remove inflationary effects. Original stock prices and market indices are published in the daily
newspaper and the website of PSE so information on stock price and market indices will be taken
from the respective source.
After collecting data it would be tested and estimated by using different time series econometric
techniques. The estimated results and findings will be properly interpreted and will be presented
with graphs wherever required for to make the reader’s understanding more and more clear and
understandable. The conclusion will be drawn from the findings from the analysis of research
and recommendation will be made.After estimations and interpretations of models, the study will
be concluded and recommendations will be given to the government, businesses, policymakers
and other researchers.


Major variables in our research model are PI, Financial Development (FD), Foreign Private
Investment (FDI, FPI) and Real Growth Rate GDP. Since this study is a country-specific that is
with respect to Pakistan, and a time series data from 1975 to 2017 will be taken. Therefore, the
data is absolutely secondary in nature. Most variables are macroeconomic and the data regarding
these macro variables is already published and available on different data basis like WDI, IMF,
SB, IFS etc. Some proxies have been used that have been calculated by taking different ratio in
relations to another variable. The political instability index has been constructed with the help of
principal component analysis (PCA). PI is not an easy task to measure so we will take numerous
political instability factors for this index. These factors may be a terror, regime changes,
corruption, chaos, the assassination of political leaders, military coups, coalition party system,
cabinet changes, frequent elections, fractionalization and secession movements, guerrilla warfare
etc. After developing PI index we will measure the growth rate of GDP “g” in Pakistan. Here
growth is taken as investment/GDP ratio, investment, lagged value of real GDP, the rate of
exports, growth rate of labor etc. The PI index will be created by giving random numbers to the
political instability factors by using by using STATA 13. (Gyimah-Brempong, 1999).


In this research, regression analysis, 2SLS and 3SLS technique, simultaneous equations, unit root
test, co-integration, ECM, and ARDL methodology will be used as a tool for analysis. The
reason for using this technique is it gives more weight to present data. It is more analytical and
In this study PI, Foreign Private investment, both PDI and FPI, Financial Development and real
growth rate of GDP are the foremost variables of the study. The Nexus between these will be
analyzed by using the following simultaneous equations. Initially, at first stage, political
instability index will be constructed with the help of PCA using political instability factors. In
the second stage, the influence of political instability on private investment will be determined.
At the third stage, the effect of FPI on growth will be analyzed. Finally, financial development
will be measured and later on its nexus with growth will be analyzed.
In this study investment analysis and portfolio management, corporate finance, financial
management, international trade, macroeconomics books and research articles are taken as
reference and to cite the important concepts related to the study. As this study is a time series so
to check the overall nexus between PI, FPI, FD and GDP time series econometric methodology
will be used to judge the short-run and long-run association of the mentioned variables among
themselves. For this unit root, cointegration, ECM, and ARDL modelling will be applied.


To measure the PI growth relation, PI has been taken as the dependent variable and all other
political instability factors are taken as independent variables discussed in the past literature. we
developed PI and growth function, the power of military action (mil), the legal governmental
procedure (lgsl), country head (gen, pres) and the level of fractionalisation of state (frac). So we
can write PI model as:
PI = β0 + β1 g + β2 mil + β3 frac + β4 press + β5 gen + β6 lgsl + β7 yt−1 + β8 PIt−1 + ɛ … .1
where “ɛ" is a residual term.


G = α + α1 K + α2 Lab + α3 EXP + α4 yt−1 + α5 PI + ϵ ………………………………2
Where "G" is an explained variable which denotes the GDP growth rate, “Lab” is labor rate of
growth, "K" denotes investment variable, “EXP” denotes growth of exports. “PI” is political
instability, yt−1 is lag value of real GDP per capita and "ϵ" is the residual term. “K” is being used
as an input factor which is likely to be positive. Neoclassical growth hypothesis describes a rise
in population leads GDP per capita growth to fall, at ceteris paribus (Gyimah-Brempong, et al.,


In this section investment equation has been developed to see the effect of savings and PI and
investment. The anticipated deleterious influence of PI on investment will be analyzed in this
model propagated by Gyimah-Brempong (1996), Devereaux and Wen (1996), Osler and Rderik
(1992), and. This investment equation is written as:
𝐾 = 𝛾0 + 𝛾1 𝑔 + 𝛾2 𝑃𝐼 + 𝛾3 𝑃𝐼𝑡−1 + 𝛾4 𝑚 + 𝛾5 𝑓𝑑 + 𝛾6 𝑆 + 𝛾7 𝐾𝑡−1 + ɛ … … … 3

Where “m” denotes the ratio of imports to GDP, “fd” denotes the ratio of real foreign debt
service/GDP ratio, “s” denotes savings, 𝐾𝑡−1 is the lage value of investment “ɛ” is the residual
term. It is expected that the coefficients of g and s may be positive.


From above individual equations, we develop a composite system of simultaneous equations that
will be estimated in the econometric model as:
𝑃𝐼𝑡 = 𝛽0 + 𝛽1 𝑔𝑡 + 𝛽2 𝑚𝑖𝑙𝑡 + 𝛽3 𝑓𝑟𝑎𝑐𝑡 + 𝛽4 𝑝𝑟𝑒𝑠𝑡 + 𝛽5 𝑔𝑒𝑛𝑡 + 𝛽6 𝑙𝑔𝑠𝑙𝑡 + 𝛽7 𝑐𝑜𝑟𝑝𝑡 + 𝛽8 𝑡𝑒𝑟𝑟𝑜𝑟𝑡
+ 𝛽9 𝑒𝑙𝑒𝑐𝑡 + 𝛽10 𝑟𝑒𝑔𝑡 + 𝛽11 𝑌𝑡−1 + е𝑡 𝑃𝐼𝑡 + 𝜇𝑡
𝑘𝑡 = 𝛾0 + 𝛾1 𝑔𝑡 + 𝛾2 𝑃𝐼𝑡 + 𝛾3 𝑃𝐼𝑡−1 + 𝛾4 𝑚𝑡 + 𝛾5 𝑟𝑒𝑠𝑡 + 𝛾6 𝑆𝑡 + 𝛾7 𝑘𝑡−1 + 𝜀𝑡
𝑔𝑡 = 𝛼0 + 𝛼1 𝑘𝑡 + 𝛼2 𝑙𝑡 + 𝛼3 𝑋𝑡 + 𝛼4 𝑌𝑡 + 𝛼5 𝑃𝐼𝑡 + е𝑡


After going through the finance and economics empirical and theoretical studies Financial
Development model is presented and with the help of this model FD is measured by using
different important determinants of FD.
Fin. Development = f (TO, PCI, INF, INT, RR, GB, M CAP, Private Credit/ GDP …....(I)
In this model Financial Development is FD, openness to trade TO, per capita income PCI, INF
denotes the rate of inflation, INT is the rate of interest, RR reserve requirement, government
borrowing G.B, Market Capitalization is M. Cap and Private Credit/ GDP a proxy to measure
FD. This functional form of the economic equation written above as Eq (I) is transformed to an
econometric form :


FDt = β0 + β1 TOt + β2 INFt + β3 PCIt + β4 INTt + β5 RR t + β6 GBt
+ β7 MCapt+ β8 Private credit/ GDP + εt … … … . (2)
Wher 𝛽1 ,𝛽2 ,𝛽3 , 𝛽4 , 𝛽5 , 𝛽6, β7 and β8 coefficients of each variable used in the above
econometric model. In this model“𝛽"0 is a fixed at each level of other coefficients. The symbole
“t” denotes that the study is time series in nature which will be conducted in Pakistan perspectiv
for the period of 1975 to 2017. At the end of the model the term “εt ” shows the random error



Financial sector development is the process of developing financial markets improved financial
institutions, insurance companies, which provides credit to the enterprises and to the households.
This process enhances the growth process of a country.Moreover, it facilitates each segment of
businesses and society. A developed system helps in reducing inflation, poverty, and
unemployment by raising income level, the level of credit to businesses and providing technical
skills and services.The proxies private sector credit in relations to GDP and market capitalization
are considered suitable measures of FD. This improved and developed financial sector also
strengthens the efficiency of financial institutions.

It is the rise in the average price level of goods and services in a country for a specified period
world bank (2011). Inflation can be calculated by the annual % price change. It is said, inflation
is inversely correlated with financial development.


Trade openness is the percentage total value of exports and the value of imports as a percentage
of GDP. Due to free trade and globalization the world is knitted in a net and came close to each
other enjoying the fruits of trade and in this way total trade volume is increasing. This increased
in trade due to open trade opportunities financial development of an economy getting better.


Per capita income is considered an indicator living standard of a country. It is obtained by total
GDP divided by total population. A higher living standard is an indicator of higher financial


It is the cost or price of money. This is an annual rate of interest charged by financial institutions
for their loans or lendings to meet the fleet fleeting deficiencies of financial resources. If banks
keep interest rate high than normal rage it cuts the amount of banks advances to the private
demanders. The interest remains in a normal range due to the interbank competition.To promote
financial sector development it is appropriate to keep the interest rate low.


The can be defined as “the minimum reserve or cash requirement set by the central bank that the
commercial banks should keep (rather than lend out) of the money deposited by the customer.
This proxy is used to determine the performance of the financial institutions. Sometimes small
amount has used an instrument to improve the performance financial intermediaries to stimulate
financial sector growth.


Money borrowed from by the government from the intermediaries to spend on government, the
defense as well as public expenditures. This proxy is also used to measure financial
development. It is calculated as government credit as a percentage of GDP.


The per capita real GDP growth is the ratio of real GDP to the total population.It will be used in
this study to capture the aggregate demand conditions in the country. This variable was chosen
since it considers the effects of population. The data for this variable will be obtained from WDI


Private Investment as a ratio to GDP is a powerful indicator for modernization, growing
productivity as well as creating new prospects for obtaining efficient techniques of production
and increase the capital accumulation thereby improving the productive capability of a country.It
is projected that there is a positive effect of private investment, financial sector development and
ultimately growth rate ie GDP. The investment data will be collected from world development
indicator (WDI).


Government size is taken another independent variable. Due to increased govt size, plenty of
resources will be diverted to the govt and fewer resources will be allocated to development
which is significant for the growth of a country. that will be used in this study. Thus the
increased govt consumption causes declines in the GDP of a country.
Terms of trade “TOT” are another key variables that define growth. TOT is used as a proxy for
outside tremors to the country. It is the value of exports need to buy imports. if the exchange rate
in unfavorable may be harmful to current account deficit, that is considered a key indicator of
economic volatility. It can negatively affect foreign investments and economic growth to fall.


This is the total number of outstanding shares of a business in the market. It is called as "market
cap,". Market cap is calculated by multiplying total outstanding shares by the market price per
share “MPS” in the market.Market cap is an excellent “Proxy” to measure the value of a


“Private Sector Credit percentage of GDP” has been taken as proxy to measure financial sector
Development. This is an appropriate measure of Financial development. Moreover, this financial
development causes economic growth to increase in a country, which is in accordance with



Following theoretical as well as empirical literature, FD will be captured using private sector
credit in relation to GDP proxy.This proxy is considered the best estimate of FD.In this regard,
therefore, the empirical model will be estimated to measure the FD and growth nexus in
𝒍𝒏𝒀𝒕 = 𝜷𝟎 + 𝜷𝟏 𝒍𝒏𝑪𝑷𝑺𝒕−𝟏 + 𝜷𝟐 𝒍𝒏𝑶𝑷𝒕−𝟏 + 𝜷𝟑 𝒍𝒏𝑮𝑺𝒕−𝟏 + 𝜷𝟒 𝒍𝒏𝑰𝑵𝑽𝒕−𝟏 + 𝜷𝟓 𝒍𝒏𝑻𝑶𝑻𝒕−𝟏
+ 𝜷𝟔 𝒍𝒏𝒀𝒕−𝟏 + 𝜷𝟕 𝒍𝒏𝑭𝑫𝒕−𝟏 + 𝜷𝟖 𝒍𝒏𝑴. 𝑪𝑨𝑷 + 𝜷𝟖 𝒍𝒏𝒄𝒓𝒆𝒅𝒊𝒕 𝒕𝒐 𝑮𝑫𝑷 + ɛ𝒕

𝒍𝒏𝒀𝒕 = Per capita growth of Real GDP.
𝒍𝒏𝑶𝑷𝒕 = Trade openness ( Total worth of exports & imports relation to GDP)
𝒍𝒏𝑪𝑷𝑺𝒕 = Private sector credit in relation to GDP (Proxy for financial development)
𝑰𝑵𝑽𝒕 = Real private Investment
𝒍𝒏𝑮𝑺𝒕 = Government size in relation to growth of GDP
𝒍𝒏𝑻𝑶𝑻𝒕 =Terms of trade
𝒍𝒏𝑭𝑫𝒕−𝟏=Measure of Financial Sector Development
𝒍𝒏𝒚𝒕−𝟏= lag value of Per capita growth of Real GDP
𝐥𝐧𝐌𝐚𝐫𝐤𝐞𝐭 𝐂𝐚𝐩= Market Capitalization
ln =Natural log
𝛃′𝐬= Parameters to be estimated
𝜀𝑡 , µ𝑡 and 𝜈𝑡 are white noise process



The poxy private sector credit in relation to GDP is taken to determine financial development
This measure is considered to be the most appropriate measure of financial intermediation to the
private sector (Favara, 2003). It is expected that this measure will provide accurate information
on growth finance nexus and its effects on growth. Because it is argued by (Akinboade, 1998)
and (Levin et al., 2000) that private sector credit is more productive and efficient and it has
strongly been affected financial sector and growth than another measure of financial sector
development (Levin et al., 2000) and (Roe,2011).


To determine the finance-growth nexus and it's overall effects on the economy, appropriate
econometric methods are used for analysis, estimation, and interpretation. In this study co-
integration and ECM modeling, ARDL bounds test and Unit root econometric modeling has been
applied to test the uni-directional or sometimes bi-directional causality both in short-run as well
as long-run. The (ARDL) bounds test investigation method of co-integration is a contemporary
and marvelous econometric modeling of time series studies, Pesaran et al. (2001) and Pesaran
and Shin (1999). These methods overcome the short-comings of Engle-Granger (1987),
Johansen (1991) and Johansen and Juselius(1990) Co-integration methods. as given below:
First: ARDL can be used without prior testing the order of integration of series. This can be used
either in the order I(0) or I(1).
Second: This technique uses the maximum numbers of lags to analyze the data processing of
general to the specific framework (Jalil et al. 2008).
Third: In time series data analysis endogeneity problem is observed on and off. ARDL approach
handles this issue comprehensively. In this approach, Pesaran and Shin (1999) used ARDL
modeling to discuss endogeneity and autocorrelation problems by introducing suitable numbers
of lags.According to Jalil et al. (2008), endogeneity is less of a problem if the estimated ARDL
model is free of autocorrelation. Jalil et al. (2008), claimed that when ARDL estimation is free of
autocorrelation then endogeneity problem becomes less and less.
Fourth: In recent emerging studies ARDL technique is widely used in this kind of empirical
studies as it is a addresses the small samples whereas Johanson. Hence, ARDL model can be
specified as:
𝑘 𝑘 𝑘

∆𝑙𝑛𝑌𝑡 = 𝛽0 + ∑ β1i ∆𝑙𝑛𝐶𝑃𝑆𝑡−1 + ∑ β2i ∆𝑙𝑛𝑂𝑃𝑡−1 + ∑ β3i ∆𝑙𝑛𝐺𝑆𝑡−1

𝑖=1 𝑖=1 𝑖=1
𝑘 𝑘 𝑘

+ ∑ β4i ∆𝑙𝑛𝐼𝑁𝑉𝑡−1 ∑ β5i ∆𝑙𝑛𝑇𝑂𝑇𝑡−1 + ∑ β6i ∆𝑙𝑛𝑌𝑡−1 + 𝛼1 𝑙𝑛𝐶𝑃𝑆𝑡−1

𝑖=1 𝑖=1 𝑖=1

+ 𝛼1 𝑙𝑛𝐶𝑃𝑆𝑡−1 + α2 lnOPt−1 + α3 lnGSt−1 + α4 lnINVt−1 + β5 lnTOTt−1 + εt

Where ∆ shows change symbol, lag length is “k” and “𝜀𝑡 " error term expected there is no serial
correlation. ARDL technique encompasses two stages. In first step, 𝐻0 is establised to show no
co-integration given as 𝐻0 = 𝜶𝟏 = 𝜶𝟐 = 𝜶𝟑 = 𝜶𝟒 = 𝜶𝟓 = 𝟎 and is tested against the
alternative hypothesis 𝐻1 ≠ 𝜶𝟏 ≠ 𝜶𝟐 ≠ 𝜶𝟑 ≠ 𝜶𝟒 ≠ 𝜶𝟓 ≠ 𝟎 of the presence of co-integration
After confirmation of co-integration, ARDL long-term and ECM estimations are estimated.
The investigative test of ARDL may be observed short-run approximations. The error correction
“ECM” depiction can be written as:
k k k

∆lnYt = β0 + β1 lnFD + ∑ β2i ∆lnOPt−i + ∑ β3i ∆lnGSt−i + ∑ β4i ∆lnINVt−i

i=0 i=0 i=0
k k

+ ∑ β5i ∆lnYt−i + ∑ β6i ∆lnTOTt−i + γECMt−i + νt

i=0 i=0

The variable FD model is financial development representing the private sector credit in relation
to GDP is a proxy has been taken to estimate financial sector development whereas, variable “
γECMt−i " estimates capture long-run connection. Theoretically, the term γECMt−i 𝑡ℎ𝑒 variable is
supposed to be negative and less than one to indicate the re-adjustment process to correct itself to
bring back to long-run equilibrium from disequilibrium.


In Financial econometric modelings, it has been envisaged, in time series studies in an
autoregressive process the estimates are not true and reliable due to the problems of an-
stationary. It means that the data series is not stationary and the forecasting in future may not be
valid. This very problem can be dealt by transforming the data series to stationary one so that the
problem of the unit root may be avoided. Unit root means that the variables are non-stationary
and has a unit root showing time trend in the data. The estimates of such data series having trend
give the spurious one.
The unit root test is performed to test null hypothesis for the presence or absence of unit root.If
unit root exists in the data it signifies t-tests will not be valid and the estimates are ambiguous
and deceptive. It means that there is a problem of autocorrelation/serial correlation in an
autoregressive process. Due to a non-stationarity of data, the estimators are deceptive and the
results are spurious with high R-Square and unreliable estimators. There is two major test for
testing unit root in econometric literature. Famous ADF and Pillips Perron tests will be
performed to check stationarity. Inbound test of co-integration, there is no need to test unit root.
But to make the ARDL valid it is appropriate to check unit root.


For the measurement of Growth rate ∆, 𝑌 is taken as dependent variable in the model where as
investment, labour, export, laged variable 𝑌𝑡−1 of growth, political instabiblity PI, financial
development,FD, foreign prifvate investment ( FDI, FPI) are taken as explanatory variables. It
is argued that if there is political instability in an economy then it will cause productivity to
decline, either PI may cause investment to fall Fosu (1992). Moreover, additional variables are
added in the regression model to estimate the over all change in growth due to these explanatory
variables. Finally the growth regression modl can be specified as:
∆Y = β0 + β1 Invstment + β2 Lab + β3 Exp + β4 Yt−1 + β5 PI + β6 FD + β7 FDI + β8 FPI + µ
Where ∆ Y is the GDP growth rate, Labour growth rate is “lab” investment, exports growth rate
is exp, political Instability is PI, lag per capita real GDP, Yt-1, FD, financial development FDI,
direct foreign investment is FDI, FPI, foreign portfolio investment and µ is residual. Where βs
are coefficients of-of the respective variable. (Roe,2011)

This research study will envisage and endeavour to develop the finance-growth nexus via PI and FPI
in Pakistan context using time series data set. As Pakistan has been remaining under terrorists attacks
since 2002 and due to this it has faced the problem of low foreign investment and low economic
performance. Owing to this Pakistan’s economy can not be compared with other developing
economies of the world. This study will explore the finance-growth nexus via foreign capital inflow
and political instability factors. Literature shows an inverse association of financial development and
growth in the presence of political instability and low foreign inflows either direct investment or low
market capitalization and private sector credit in relation to GDP, as these are proxies used to
determine financial sector performance and its development.

This study will expectedly investigate then nexus between PI, FDI, FPI and GDP growth in Pakistan,
which will guide the investors, governments, multinationals and policymakers to reshape their
investment strategies and look beyond the local markets. They will definitely look around in the
countries where a politically stable environment prevails for their investments. The foreign investors
and investment can be attracted due to this mechanism and it will raise the prosperity of the countries.
Literature shows that India is a comparatively better for foreign private investment than Pakistan. So
to attack this capital Pakistan’s policymakers, governments, institutions and other elite groups have to
make investor’s friendly policies.

Abbas, Q. (2001). Endogenous growth and human capital: A comparative study of Pakistan and

Sri Lanka. The Pakistan Development Review, 40 (4), 987-1007.

Abu-Bader, S. and Abu-Qarn, A., (2006). Financial Development and Economic Growth Nexus:

Time Series Evidence from Middle Eastern and North African Countries. Munich

Personal RePEc Archive (MPRA) Paper 972, University Library of Munich, Germany.

Abu‐Bader, S., & Abu‐Qarn, A. S. (2008). Financial development and economic growth:

empirical evidence from six MENA countries. Review of Development

Economics, 12(4), 803-817.

Adeniyi, O., Oyinlola, A., Omisakin, O., & Egwaikhide, F. O. (2015). Financial development

and economic growth in Nigeria: Evidence from threshold modeling. Economic Analysis

and Policy, 47, 11-21.

Adua, G., Marbuahb, G.,Mensah, J. T. (2013).“Financial development and economic growth in

Ghana: Does the measure of financial development matter?” Review of Development

Finance 3 (2013) 192–203.

Afza, T., & Nazir, S. (2007). Economic competitiveness and human resource development: An

FDI perspective. Pakistan Economic and Social Review, 45(2), 167-180.

Agosin, M., & Mayer, R. (2000). Foreign investment in developing countries: Does it crowd in

domestic investment? UNCTAD Discussion Papers No. 146.

Ahmad, M. H., Alam, S., & Butt, M. S. (2004). Foreign direct investment and domestic output in

Pakistan. Nineteen Annual General Meeting, PIDE, Quaid-e-Azam UniversityIslamabad,


Ahmad, M. H., Alam, S., Butt, M. S., & Haroon, Y. (2003). Foreign Direct Investment, Exports,

and Domestic Output in Pakistan. The Pakistan Development Review, 715-723.

Aitken, B., & Harrison, A. E. (1999). Do domestic firms benefit from the direct foreign

investment? Evidence from Venezuela. The American Economic Review 89(3), 605-618.

Albulescu, C. T. (2015). Do Foreign Direct and Portfolio Investments Affect Long-term

Economic Growth in Central and Eastern Europe?. Procedia Economics and

Finance, 23, 507-512.

Alesina, A., & Perotti, R. (1996). Income distribution, political instability, and

investment. European economic review, 40(6), 1203-1228.

Alesina, A., Özler, S., Roubini, N., & Phillip Swagel, P. (1992). Political Instability and

Economic Growth. NBER Working Paper No. 4173

Alesina, A., Özler, S., Roubini, N., & Swagel, P. (1996). Political instability and economic

growth. Journal of Economic growth, 1(2), 189-211.

Alfaro, L., Chanda, A., Kalemli-Ozcan, S., & Sayek, S. (2006). How does foreign direct

investment promote economic growth? Exploring the effects of financial markets on

linkages (No. w12522). National Bureau of Economic Research.

Ali, H. S., Hashmi, S. H., & Hassan, A. (2013). The relationship between political instability and

domestic private investment in Pakistan: A time series analysis (1972-2009).

Antique, Z., Ahmad, M. H., & Azhar, U. (2004). The impact of FDI on economic growth under

foreign trade regime: A case study of Pakistan. Pakistan Development Review, 43(4) Part

II, 707-718.

Anwar, Z., & Afza, T. (2014). Impact of terrorism, gas shortage and political instability on FDI

inflows in Pakistan. Science International, 26(1), 507-511.

Aqeel, A., & Nishat, M. (2005). The determinants of FDI in Pakistan. Submitted for a 20th

annual conference of Pakistan Society of Development Economists (PSDE), Islamabad,


Asghar, N. & Hussain, Z.(2013),“Financial development, trade Openness and economic growth

in developing countries recent evidence from panel data” Pakistan Economic and Social

Review Volume 52, No. 2 (Winter 2014), pp. 99-126

Bagehot, W. (1873), Lombard Street (1962 edition). Homewood, IL: Richard D. Irwin.

Baghebo, Apere, M. and Thankgod O (2014). Foreign Portfolio Investment and Economic

Growth in Nigeria (1986-2011). International Journal of Business and Social

Science.Vol 5 No 11(1).

Baharumshah, A. Z., & Thanoon, M. A. M. (2006). Foreign capital flows and economic growth

in East Asian countries. China Economic Review, 17, 70-83.

Balasubramanyam, V.N., Salisu, M., & Sapsford, D. (1999). Foreign direct investment as an

engine of growth. The Journal of International Trade and Economic Development, 8(1),


Barro, R. J. (1991). Economic growth in cross-section of countries. Quarterly Journal of

Economics, 106(2), 407-443.

Beck, T. and R. Levine (2004), Stock markets, banks, and growth: Panel evidence. Journal of

Banking & Finance, Volume 28(3), pp. 423-442.


Beck, T., & Levine, R. (2002), Industry growth and capital allocation: Does having a market- or

bank-based system matter? Journal of Financial Economics, 64, 147–180.

Beck, T., Büyükkarabacak, B., Rioja, F. K., & Valev, N. T. (2012). Who gets the credit? And

does it matter? Household vs. firm lending across countries. The BE Journal of

Macroeconomics, 12(1).

Beck, T., Levine, R. and Loayza, N. (2000), “Finance and the sources of growth”, Journal of

Financial Economics, Vol. 58 No. 2, pp. 261–300.

Beck, Thorsten, Robert Cull, and Afeikhena Jerome. 2005. “Bank Privatization and

Performance: Empirical Evidence from Nigeria”, Journal of Banking and Finance29,


Beck, Thorsten, Berrak Buyukkarabacak, Felix Rioja and Neven Valev. 2009. “Who Gets the

Credit? And Does it Matter? Household vs. Firm Lending Across Countries” CentER

Discussion Paper, Tilburg University

Bhatti, A. A., Haque, M. E., & Osborn, D. R. (2013). Is the Growth Effect of Financial

Development Conditional on Technological Innovation?.

BUSARI et al.(2007). “Private Investment And Political Instability: Evidence From Nigeria”.

International Journal of Applied Econometrics and Quantitative Studies Vol. 4-2 (2007).

Chaudhry, I. S., Farooq, F., & Mushtaq, A. (2014). Factors Affecting Portfolio Investment In

Pakistan: Evidence From Time Series Analysis. Pakistan Economic and Social
Review, 52(2), 141.

Christopoulos, D. K., & Tsionas, E. G. (2004). Financial development and economic growth:

evidence from panel unit root and cointegration tests. Journal of Development

Economics, 73(1), 55-74.

Cointegration Analysis. The Ragnar Frisch Centennial Symposium. Cambridge

University Press, Cambridge.

D. Haendel, G. West, R. Meadow, "Overseas Investment and Political Risk", foreign policy Re-

searchInstitute, M monographs series No. 21, 1975, Philadelphia,P Pennsylvania

Demetriades, P.O. and Hussein, A.K. (1996), Does Financial Development Cause Economic

Growth? Time Series Evidence From 16 Countries. Journal of Development Economics,


Does financial development cause economic growth? The implication for policy in Korea.”

Journal of Policy Modeling 30 (2008) 827–840

Economic Growth in Central and Eastern Europe? Procedia Economics and Finance 23

Ekeocha et al. (2012).“Modelling the Long Run Determinants of Foreign Portfolio Investment

in Nigeria” Journal of Economics and Sustainable Development ISSN 2222-1700

(Paper) ISSN 2222-2855 (Online) Vol.3, No.8.

F. R. Root, "Attitudes of American executives toward foreign governments d Investment

opportunities", Economic and business bulletin,J January,1 968.

Feng, Y. (2001). Political Freedom, Political Instability, and Policy Uncertainty: A Study of

Political Institutions and Private Investment in Developing Countries International

Financial Sector in Economic Growth: Time Series Evidence from LDCs. Journal of

Development Economics 50(1), 119-146.

Fosu, A. K. (1992). Political instability and economic growth: evidence from Sub-Saharan

Africa. Economic Development and cultural change, 40(4), 829-841.

Gimet, C. & Lagoarde-Segot, T.(2012),“Financial sector development and access to finance.

Does size say it all”? Emerging markets review 13( 2012) 316-337.

Gumus, G. K., Duru, A., & Gungor, B. (2013). The relationship between foreign portfolio

investment and macroeconomic variables. European Scientific Journal, ESJ, 9(34).

Gupta, Dipak, K. (1990). The Economics of Political Violence: The Effect of Political.Instability

on Economic Growth. New York.

Gyimah-Brempong, K., & Traynor, T. L. (1999). Political instability, investment and

economic growth in Sub-Saharan Africa. Journal of African Economies, 8(1), 52-86.

Haider.A.M,Khan.A.M. & Abdulahi.E..Determinants of Foreign Portfolio Investment and Its

Effects on China International Journal of Economics and Finance ISSN 1916-971X

(Print) ISSN 1916-9728 Harvard University Press.

Harvard University Press.

Hasan, A., & Nasir, Z. M. (2008). Macroeconomic factors and equity prices: An empirical

investigation by using ARDL approach. The Pakistan Development Review, 501-513. rs/index.html

Johansen S and Juselius K (1990) ‘Maximum Likelihood Estimation and Inference on

Cointegration With Application to the Demand for Money’, Oxford Bulletin of

Economics and statistics,52,169-210.

Johnson, T., R.O. Slater and P. McGowan(1984) “Explaining African Military Coups d'Etat,

1960-1982”, The American Political Science Review, Vol. 78, No. 3. (Sep. 1984), pp.


Kiprop M. J. et al., (2015). Effect of financial development on economic growth in

Kenya:evidence from time series analysis. European journal of business and social

sciences, vol. 3, no.11.

Lee, C. C., & Chang, C. P. (2009). FDI, financial development, and economic growth:

international evidence. Journal of applied economics, 12(2), 249-271.

Levine, R. (1997). Financial development and economic growth: views and agenda. Journal of

economic literature, 35(2), 688-726.

Levis.M, (1979). “Does Political Instability in Developing Countries Affect Foreign Investment

Flow? An Empirical Examination” Management International Review, Vol. 19, No. 3


Mankiw, N. G., Romer, D., Weil, D., & Shigehara, V. (1992).Causes of Declining Growth in

Industrialized Countries in Policies for Long Run Economic Growth. Kansas City Fed

Moradbeigi, M., & Law, S. H. (2017). The role of financial development in the oil-growth

nexus. Resources Policy, 53, 164-172.

Nauro, F. Campos, & Jeffrey, B. N. (2002). Who is afraid of political instability? Journal of

Development Economics

Oladipo T. B. & Lloyd, A.(2007) “Private Investment And Political Instability: Evidence From

Nigeria”, International Journal of applied econometrics & quantitative study Vol. 4-2

Omisakin, D., & Olusegun, A. (2015). Financial Development and Economic Growth in Nigeria:

Evidence from Threshold Modelling.Economic Analysis and Policy 47 (2015) 11–21

Online at, MPRA Paper No. 23431, posted 25. June

2010 01:38 UTC

Pesaran M, Shin Y. (1999). An Autoregressive Distributed Lag Modelling Approach to

Poirson, Helene (1998),: Economic Security, Private Investment and Growth in developing

countries”, International Monetary Fund Working Paper, 98/4.

Qayyum, A., Siddiqui, R., & Hanif, M. N. (2004). Financial development and economic growth:

evidence from heterogeneous panel data of low income

Ranis, G., & Fei, J. C. (1961). A theory of economic development. The American economic

review, 533-565.

Roe, M. J., & Siegel, J. I. (2011). Political instability: Effects on financial development, roots in

the severity of economic inequality. Journal of Comparative Economics, 39(3), 279-309.

Samargandi, N., Fidrmuc, J., & Ghosh, S. (2015). Is the relationship between financial

development and economic growth monotonic? Evidence from a sample of middle-

income countries. World Development, 68, 66-81.

Schumpeter, J. A. (1911), The Theory of Economic Development. Cambridge, MA:

Schumpeter, J., & Backhaus, U. (2003). The theory of economic development. Joseph Alois

Schumpeter, 61-116.

Selected Papers for 2002 Annual Conference, Nigerian Economic Society, Ibadan, pp 53-78.

Soh, B. H. (1988). Political Instability and Economic Fluctuations in the Republic of Korea

Kluwer Academic Publishers.Quarterly.

Svensson, J. (1998). Investment, Property Rights and Political Instability: Theory and

Evidence. European Economic Review

Tabassam, A. H., Hashmi, S. H., & Rehman, F. U. (2016). The nexus between political

instability and economic growth in Pakistan. Procedia-Social and Behavioral

Sciences, 230, 325-334.

Takyi, P. O., & Obeng, C. K. (2013). Determinants of financial development in

Ghana. International Journal of Development and Sustainability, 2(4), 2324-2336.

Ugwuanyi, U. (2012), “Econometric Evaluation on the Impact of Foreign Direct Investment on

the Economic Growth of Nigeria”. Research Journal of Finance and Accounting, Vol 3,

No.11, 2012

Ullah, S.F. & Hashmi, S.M.,(2016),“Financial development and economic growth: panel cross-

country study” Jinnah Business Review 2016 Vol.4, No.1, 9-21.

Voghouei, H. Azali, M. & Jamali, M. A.,(2011),” A survey of the determinants of financial

development” Asian Pacific Economic Literature,(2011):, doi: 10.1111/j.1467-


Voghouei, H., Azali, M., & Law, S. H. (2011). Does the political institution matter for financial

development?. Economic Papers: A journal of applied economics and policy, 30(1), 77-


Voghouei.H,A.M.,&Jamali.A.M.(2011).A survey of the determinants of financial development”

Asia Pacific-Economic Literature (2011).

Waqas, Y., Hashmi, S. H., & Nazir, M. I. (2015). Macroeconomic factors and foreign portfolio

investment volatility: A case of South Asian countries. Future Business Journal, 1(1),

Yang, Y. Y., & Yi, M. H. (2008). Does financial development cause economic growth? The

implication for policy in Korea. Journal of Policy Modeling, 30(5), 827-840.